THE MARKETS: Market Place; When Volatile Is the Word, Traders Scramble for Footing

By MATT RICHTEL

Published: August 8, 2002

Todd Nagel, who trades stocks full time in downtown San Francisco, dismissed Wall Street's biggest event on Tuesday. He was so unconcerned about the news -- the earnings report from Cisco Systems, an ostensible market bellwether -- that shortly after the New York markets had closed, he turned off his computer and headed home for the day.

After all, Mr. Nagel had already got what he wanted out of the market that day: Volatility. Piles of it.

''It creates opportunity. You want to see order flow -- lots of buyers and sellers coming in,'' said Mr. Nagel, 38, who trades for his own account in a Bright Trading office. As for Cisco, he said: ''I really wouldn't pay any attention.''

Along with corporate scandals and painful losses, the summer on Wall Street has been one of unusual volatility. A key measure of market volatility surged in late July to its highest level since the 1987 crash and has been sustained for a period not recorded since after the Sept. 11 attacks and the collapse of Long-Term Capital in 1998. To some, the extraordinary volatility is an indicator that the market will soon turn.

Across the world, traders are trying to find their place and a rhythm in what professionals are referring to as a ''trader's market.''

Because of the uncertain outlook, long-term investors have been wary of adding to their stock holdings. But Mr. Nagel and professional day traders like him, whose number has been depleted by the collapse of the bull market, prey on the wild swings, trying to capture a dime here or a nickel there on trades of 100 shares to several hundred thousand shares. Traders of stocks at big firms -- like Merrill Lynch or Charles Schwab -- say they can also take advantage of the mercurial movements though they do not find volatility inherently good.

The action does not play as well among smaller investors who follow the market from a home office and who still trade -- though not as feverishly as in the dot-com boom. These people wait for the news on the economy, Cisco and other companies that may indicate a change in the market's momentum, looking for signs of stability and direction. Where will the market go? Will it become easier to make a buck?

Interviews this week with a variety of traders, from people who manage their own retirement money to full-time traders to big-time money managers, show how Cisco's news was anticipated and processed and at times even disregarded.

Though Cisco's earnings report exceeded expectations and its stock rose 14 percent over the last two days, its chief executive said he remained concerned about business at the service providers in the telecommunications industry. When trading resumed yesterday, phone stocks had the biggest decline in the Standard & Poor's 500-stock index. Over all, stock prices rose.

By phone from Israel, Phil Bak described how he arrived at the Jerusalem Straight Line Securities day trading office on Tuesday at 3:30 p.m., an hour before the market opened in New York. Like Mr. Nagel, Mr. Bak uses sophisticated software in hopes of making pennies of profit on frequent trades. On Tuesday, punctuated by cheese pizza and an afternoon prayer break with his fellow Orthodox Jews, he traded well, turning quick hits on trades involving Microsoft and Electronic Arts, a video game company. Mr. Bak said he was up $630 (excluding commissions of a penny a share).

Unlike Mr. Nagel, though, he was eager to see Cisco's results, hoping to get a sense of the market's direction from the giant maker of Internet networking equipment. ''There can be a chain reaction if Cisco has good earnings,'' he said. ''It can move the futures, which will move the stocks, and turn the whole direction of the market around.'' Futures contracts on the major indexes are traded ahead of the market opening, often indicating the sentiment of institutional investors, and sometimes give the direction of the first minutes of trading.

Mr. Nagle and Mr. Bak had different views on the Cisco news because they trade stocks using different strategies. Mr. Bak is looking for and trying to capitalize on up and down trends and shifts in momentum. Mr. Nagle tries to capitalize on excessive spreads between bid and ask price on the stocks he tracks, relying far less on the market's overall direction.

Both men favor the volatility, they say, because it helps them make more money when they accurately assess the situation. Mr. Bak, 24, who has been trading since September, says he struggled initially. The ''last few months have kind of turned things around, and I've been profitable,'' he said. ''The volatility is great.''

Small fry and part-time investors, though, find not just the bear market disconcerting but also the volatility that has accompanied it of late.

Thomas J. Petrarca, 45, who lives in Woodbury, Conn., says he made 50 to 100 trades a week in the dot-com boom. This market has changed him. Now he makes perhaps 20 trades a week, sometimes fewer, and he and his business partner spend more time making investments in, and helping run, start-up companies. He has a 4-inch-thick black binder of the trades he placed in 2000; this year's binder is not yet an inch thick.